Valuation models

Mandatory convertibles

PEPS (DECS) and PERCS replicated with shares and calls under Black-Scholes, coupons off the curve plus a credit spread, shares delivered at today's price, conversion premium, delta and vega.

Inputs

Results

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Methodology

Conventions

  • PEPS: I/K₁ shares below K₁, shares worth I between the strikes, I/K₂ shares above K₂. PERCS: I/K₁ shares capped at K₂.
  • Shares and calls by Black-Scholes; coupons discounted on the curve plus the credit spread.

References

  • Hull, Options, Futures, and Other Derivatives
  • Arzac (1997)

Formulas

PEPS
E = n₁ S e^(−qT) − n₁ C(K₁) + n₂ C(K₂)
PERCS
E = n₁ S e^(−qT) − n₁ C(K₂)